June , 2017
New measure of IIP and its implications
13:37 pm

Kishore Kumar Biswas

The recent revision to the base year for the index of industrial production (IIP) reflects the recovery of the industrial sector of India. Earlier, the base year was 2004-05. The present base year has been revised to 2011-12. What is IIP? The IIP indicator measures the short-term changes in the volume of production of industrial products with reference to a base period and is not concerned with value addition. It is, therefore, not influenced by any price fluctuations. All the products which contribute 0.2% or more to the total value of production are included in the items basket. Each item included in the basket is given an appropriate weight depending on the economic activities, which need to be reflected while measuring the performance of the entire industrial sector. Unlike gross value addition, IIP is calculated as the weighted average of production relative of all the industrial activities based on Laspeyre's fixed base formula.

The IIP data based on 2011-12 show that the annual output growth has been 3.82% over the last 5 fiscal years (2011-12 to 2016-17). But that is only 1.42% or even less than it if the measure is based on 2004-05. So the new based measure of IIP with related changing of weights clearly shows the recovery of industrial growth of the Indian economy. In the new measure a lot of new products which have been in greater use at present have been brought in and a lot have been replaced whose demand and production are not very considerable.

Political impact

A lot of economists, policymakers and observers complain of slowdown of industrial production of India in spite of the huge publicity about the Prime Minister’s flagship programme of ‘Make in India’. The new measure of IIP may go against them as the new measure shows that the industrial scene is not as bad as widely criticised. There is another point that should be considered. The average five-year growth has been reported to 4.04% in the new measure compared to as low as 0.94% in the old measure. But if the new measure is accepted then the last two years of UPA-2 should have been given credit for good industrial performance. In that case, the claim of policy paralysis against the UPA-2 is blurred. The issue of policy paralysis has been claimed to be one of the very few black spots of the previous Manmohan Sing government, which led to the defeat of the Congress in the election.

The problem of establishing policy paralysis is one factor. More important is to establish justification for the initiative behind ‘Make in India’. This is because the average growth rate of IIP in the Modi regime is yet to surpass that of the last years of the Manmohan Singh government. Even the construction sector has been slow now compared to 2013-14 on the back of the huge emphasis placed by NDA government in infrastructure.

Increasing foreign trade gap and demonetisation

Strong reference to gold is one of the conspicuous habits of Indians. It is sometimes linked with the investment choice of the people. When the financial saving or investment is risky due to its volatility in nature investment in yellow metals can be a safe game. Investment in productive activity is not suitable for all. But the present jump in import of gold is one of the concerns of the economy. This is one of the main reasons for expanding trade deficit in India. In April gold imports jumped to $ 3.85 billion compared to $ 1.23 billion April 2016. In last March the import of gold was $4.17 billion and it was exceedingly low at $ 974 million in March 2016. So the trade deficit in April was $13.2 billion. It is the highest since November 2014. Other data show how the overall trade gap increased last April. Export has increased to $25 billion but that has been surpassed by import of $ 38 billion.

Steps to reduce gold demand


The Modi government took several steps to do it. Think of the gold monetisation scheme. This was with a view to lowering gold import by using gold deposit. But the programme has not yet been successful as the amount of gold deposit under this scheme is reported to be close to 1% of the total demand for gold in the last FY. Demonetisation was also responsible for lowering demand for gold. But as the effect of demonetisation subsides, the demand for gold is known to increase to its pre-demonetisation phase. Demonetisation has brought down the demand for gold at the seven years low at 675 tonnes. It is not only to evade taxes the preference for gold is also to remain safe from government policies like demonetsation. So how far the recent high trade deficit is accentuated by the last demonetisation policy is under study. But one can be sure that the spurt in the demand for gold can be related to the demonetisation policy of the government.

Add new comment

Filtered HTML

  • Web page addresses and e-mail addresses turn into links automatically.
  • Allowed HTML tags: <a> <em> <strong> <cite> <blockquote> <code> <ul> <ol> <li> <dl> <dt> <dd>
  • Lines and paragraphs break automatically.

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.